Economic Logic, Too

About Me

I discuss recent research in Economics and various events from an economic perspective, as the name of the blog indicates. I plan on adding posts approximately every workday, with some exceptions, for example when I travel.

Friday, September 28, 2012

It is now the norm that both partners of a couple work, and with that come issues about coordinating work time around children and allowing for "together-time." While everyone's circumstances are different, policy makers ought to be interested in which work time arrangements yield the most satisfaction, and if the marketplace is not providing for such arrangements, how policy can make it happen.

Christoph Wunder and Guido Heineck use this fantastic tool, the German Socio-Economic Panel, to determine which work schedules couples prefer. Overall, they prefer matching working hours. What I find more interesting is that females prefer it when their partner works full-time, while male are largely unaffected by the number of their partner's working hours. One can find several explanations for this asymmetry, but it is difficult to discount some form of sexism in seeing male work essential, while female work is not, and even females seem to agree with this. But if people are happy with this, why should policy intervene?

Thursday, September 27, 2012

I mentioned only a couple of days ago that tax credits for economic development do not work. Yet, politicians cannot help it to grant such credits, in part because they want to show they are doing something to help the economy, and in part because they genuinely think it works. And obviously, they do not take into account that other politicians do the same thing, and thus a competition emerges that gives away more and more tax credits for no local gain and certainly no aggregate gain. How could this vicious circle be broken?

Timothy Hubbard and Justin Svec have a proposal. The idea is that these tax credits create a negative externality on other jurisdictions. Thus one could apply the same strategy as for pollution, where a limited number of pollution permits are sold or distributed (the former being the preferred way). Here politicians would have tax credit permits, which they could trade as well. The Federal government would provide these permits and could even determine a socially efficient number of them. Next: name-calling permits for bloggers.

Wednesday, September 26, 2012

It should by now be obvious to anybody who has been following this blog that I do not like time-dependent pricing (aka the Calvo fairy) because it is applicable only under specific circumstances. Of course, this means that it is routinely abused because it is analytically convenient. What would it take for people to finally abandon this modeling strategy that influences so many results in the literature? The following paper?

Peter Karadi and Adam Reiff look at yet another micro-dataset (impact of large VAT changes in Hungary) and find that prices are flexible. Nothing new here. They find also that in response to large shocks, prices react in an asymmetric fashion, depending on whether the shocks are positive or negative. Calvo models are notoriously inadequate to deal with large shocks, by construction, but they are also not capable of getting any asymmetry. Take a state-dependent pricing model, and it can easily replicate these features of the data. Karadi and Reiff thus declare a clear winner among menu cost pricing models. I am not sure I would rule out information or search frictions like they do, however.

Tuesday, September 25, 2012

Every government, from the most local to the national one, touts its success in attracting business and creating jobs through well targeted tax credits. The latter obviously come at a cost, but that is supposed to be well-compensated by new tax revenue from increased income in the particular jurisdiction. Or so these public officials think.

Luc Behaghel, Adrien Lorenceau and Simon Quantin study the French tax credit initiatives that were supposed to bring more economic activity in some rather deserted rural areas. These tax credits were implemented in various ways across time and firms, which allows to estimate their impact. And no way which way you look at the data, there is nothing to be found. That is pretty bad. In they had found an impact, one could have discussed whether it was large enough to generate increased public revenue to fund the tax credits. But there is none of that. Pure waste.

Monday, September 24, 2012

Suppose you are a manager in a firm where it is difficult to observe the performance of workers, such as faculty, computer programmers or lawyers. You hire a supervisor for a team. How should you compensate the supervisor such that he puts his best effort and reports the truth to you? And how can you avoid that underlings bribe the supervisor for a good report card?

Even when being bribed is costless, Alessandro De Chiara and Luca Livio solve this seemingly impossible problem with an interesting idea: it matters when the supervisor files his report. If the supervisor has to file a report before outcomes can be observed, for example before a contract is finished, he can still make sure that workers do their job. If the report is submitted later, the supervisor can easily be bribed, and there is no incentive for workers to do well. The critical aspect here is that there is uncertainty in work outcomes and the supervisor is risk averse. Couple that with better compensation if the report corresponds to the subsequently observed outcome, and you are done.

Friday, September 21, 2012

A state-sponsored lottery is a tax on stupid people, and one may not object on its existence for this reason. Except that people may be stupid for reasons beyond their control. But let us assume that it is a tax that enhances overall well-being, for example because it drives out more harmful taxes. Wouldn't all government want to offer a lottery, especially as they can have a monopoly on the market? That is without counting with other jurisdictions, such as the Canadian federal government that may want to participate where provinces already run lotteries.

Étienne Desjardins, Mélina Longpré and François Vaillancourt explain how the provinces got rid of this unwelcome competitor. At the end of the 1970's, Loto-Canada was encroaching on the provincial lotteries, and an cartel-like agreement was struck: the provincial lotteries bought out the federal one, and they are paying to this date for the privilege of this monopoly. And the provinces got very good deal, as the agreement did not foresee the growth of this market. Maybe the federal government should threaten to reintroduce Loto-Canada to tease out a better agreement.

Thursday, September 20, 2012

From what I can see, the countries that are going to suffer the most from climate change are developing ones. As we economists are constantly worried about the efficient use of resources, I am surprised no one asked before whether one should rather invest in mitigating climate change or in improving development aid for those most affected countries.

Lucas Bretschger and Nujin Suphaphiphat try to answer this question with a model where climate change leads to a faster capital depreciation (think: more hurricanes, flooding and tornadoes). The model has two countries, a rich, capital-intensive one and a poor one. The available policies are devoting resources to pollution control or directing transfers to the poor country, which could increase its capital. While the first is obviously better for the rich country, it turns out to be also better for the poor one under fairly general conditions. The reason is that transfers have only a mild effect on growth, whereas this is not-trivial if you can avoid a faster depreciation of capital. Indeed, if you know that your investment will last longer, you will do more of it. The availability of resources for savings and investment is secondary. And that is even without assuming that development aid is not effective, as many believe.

Wednesday, September 19, 2012

Whether prices are sufficiently rigid to matter is an somewhat unsettled debate I have occasionally discussed on this blog. This is mostly a measurement issue. Once we know how it is in the data, we should know what model to use and how to calibrate it. The models that use price rigidity, the New-Keynesian, usually apply the concept in a rigid manner. For one, they use the much criticized Calvo fairy assumption. But they also assume that the same rigidity applies to the prices at which the firms sell their goods and to the prices at which households (or other firms) buy their goods.

As Olivier Coibion, Yuriy Gorodnichenko and Gee Hee Hong show, the reality is quite far from this last assumption. They use data from retailers in various US metropolitan areas which comprises both prices and quantities. They find that household switch easily retailers and take advantage of temporary sales. How much they do this varies through the business cycle, with an interesting implication: the effective household inflation rate is lower when unemployment is high. This implies that monetary easing becomes more difficult because household-level prices adjust 2.5 times faster than retailer-level prices.

The impact on the response of the output gap after a monetary stimulus is, however, almost identical to a model without retail switching. I suspect this is due to the fact that the model still uses Calvo pricing. Beyond the usual criticism of this assumption, here it also implies that retailers cannot take into account that households may want to switch retailers more frequently in a recession. Too bad that a very interesting result is poorly applied in this study.

Tuesday, September 18, 2012

How redistributive should tax policy be? To some extend this is a matter of preferences, at it depends on what the social objective is. Once the politicians have agreed on this, one can let the economists figure out how to achieve it. Unfortunately, politicians debate about policies instead of objectives, and this leads to much irrational arguing. Now let us be a little utopian: assume there were a discussion about the social objective, and the debate were whether well-being should be measured at the level of the existing individuals or the dynasties (individuals and their descendants). What would be the impact on redistribution?

I think this is who one should frame the latest paper of Alexander Gelber and Matthew Weinzierl. They consider that for economic efficiency, what matters most is earning ability. Not everyone is born with the same ability, and their is a positive but far from perfect correlation of ability across a dynasty's generations. Given that developing a child's abilities requires resources, and low-ability (and thus poor) parents may not have those, redistribution helps in generating a better use of abilities. If the objective does not take into account future generations, then one does not need such redistribution as much. So the question to our politicians is: how much do you care about the future generations? And wasn't the American Dream about giving everyone with the right skill set the opportunity to make it?

Monday, September 17, 2012

Over the past two years, much has been said about the increasing disparity of incomes across all OECD countries and how the middle class is shrinking. At least some of this evolution can be traced to the shrinking share of labor income in national income. The question, of course, is then why the labor share is decreasing. Is the economy becoming more capital intensive, as a Cobb-Douglas production function would imply? Or is globalization putting downward pressure on wages across the OECD countries?

Andrea Bassanini and Thomas Manfredi perform an analysis of the evolution of the labor share in 20 sectors of 25 countries over three decades. According to their data, about 80% of the change can be explained by a change in production technology: capital has become more important and has replaced some labor. The rest can be attributed to international competition, privatization, and the off-shore transfer of production facilities. Deregulation and its impact on domestic competition has no effect on the labor share, though.

Given these results, should we then resist technological change to preserve a sufficient labor income? This is the old Luddite argument that sought to hinder an evolution that ultimately improved the quality of life in tremendous ways. If we think about it to the extreme, why should we prevent the Star-Trek utopia of the replicator technology that produces goods without much human intervention? That labor income is then low is not important, as long as there is sufficient redistribution if capital income is highly concentrated.

Friday, September 14, 2012

Being active in old age is thought to improve life quality, health and ultimately longevity. My grand-father painted and played brain games until late in his life, and made it to 92 really enjoying his last years. But beyond such leisurely activities, working also keeps you active. Does retiring later also prolong one's life? Answering that question is not straightforward because of the reverse causality. One may be able to work longer because one is of better health and thus will live longer. And of course, those who die early may also have retired early due to health reasons.

Erik Hernaes, Simen Markussen, John Piggott and Ola Vestad look at Norwegian administrative data and find no relationship between retirement age and mortality. To avoid the endogeneity issues, they exploit the fact that the retirement age was gradually decreased for some employers. The study also takes into account that employees may have switched jobs because of these changes. They check on the impact of the actual retirement age on mortality instrumenting with the entitled retirement age, and no matter the controls there is no relationship. So it looks like being active only has an impact on the enjoyment of life in the latter years.

Thursday, September 13, 2012

In some countries, academics can be compensated for performance. Some universities provide incentives for good research and/or teaching through bonuses or pay raises. Others may only respond to outside offers, but the end effect is the same: performance compensation responds to market pressure. Or so we would like to think. There is, however, a substantial source of disagreement in how much a particular publication is worth. Everyone has his own ranking in mind, and the correlation among all those is not that high.

John Gibson, David Anderson and John Tressler look at Economics departments in the University of California system. They look at 700 Economics journals and how publication in them translates into tenure, promotion and salary increases. They compare different journal ranking schemes and finding that it is not only the order of journals that matters but also the convexity of the scores: how fast they drop after the top journals. This matter is consequential: the average lifetime output of a UC economist varies between 36 and 144 American Economic Review equivalent pages.

Results show that the statistical fits of various journal ranking schemes to salary outcomes are surprisingly close to each other. I wonder, though, how even more convex ranking schemes would have fared, such as the RePEc journal H-index which is used is several departments (but I am not sure about UC departments). Maybe this was not considered because of endogeneity issues. Another interesting result is that a 10-page article in the AER raises compensation by 1.3%, or US$27,500 in average net present value (neglecting the impact on retirement pensions).

Wednesday, September 12, 2012

The provision of health care in the United States is in a sorry state, delivering at the macroeconomic level substandard health among industrialized economies at by far the highest cost. Much needs fixing, the prime candidates being the lack of competition on the pharmaceutical market, the employer-based health insurance, the overpriced doctors and hospitals and the over-reliance on emergency care for non-emergency issues. The upcoming Obamacare tries to address a few of these issues, and we will see how it will survive the attacks of those due to lose their rents.

One facet of the proposed solution is the introduction of a public option on the health insurance market. Instead of relying entirely on the private, for-profit provision of health insurance, with a public, not for profit option is it thought that a higher level of competition can be achieved. Andrei Barbos and Yi Deng study this by building a game-theoretic model of households with uncertain health outcome choosing between private and public options. The private option survives because of product differentiation: the households that believe they have lower health risks can be attracted with higher deductibles and lower premiums. And I think that we tend to be overly optimistic in this regard, so the private insurance market will remain substantial. The paper also shows that allowing some deficit in the public option or capping the profit margin of the private insurers increases social well-being, highlighting the potential inefficiencies in private for-profit insurance.

Tuesday, September 11, 2012

Some cities permeate culture more than others. I have been struck how classical music is present in Vienna, where street musicians have symphonic orchestra quality. In this particular case, this may come from the city's history in classical composers, generating local interest in this type of culture. It may also be a market response to the tourists visiting Vienna thanks to this history.

Karol Jan Borowiecki looks at local preferences for classical music (as measured by the supply of cultural versus non-cultural goods) in Italy and finds that a substantial amount of cross-province variation can be explained by the birthplaces of Renaissance composers. This is a remarkable amount of persistence. Whether this reflects preferences of locals or tourists remains open, though.

Monday, September 10, 2012

Environmental taxes, as I have often argued on this blog, are an excellent way to raise revenue for the government while taking care of negative externatilites. But as almost any taxes, they are redistributive. In particular if environmental taxes are used to substitute for distorting income taxes, which is good, they may also change redistribution in ways that are not preferred.

Mireille Chiroleu-Assouline and Mouez Fodha admit that environmental taxes are regressive, but this is not a problem. Indeed, they show that it is possible to introduce environmental taxes by making everyone better off. This Pareto improvement comes from lowering average income tax rates with an increase of their progressivity, no matter how regressive environmental taxes are. Interestingly, this result is obtained without even using the environment in the utility of households. In other words, this could also be applied where there are no environmental externalities.

Friday, September 7, 2012

How do you measure living standards? The usual way is to look at income, because it is the easiest to find. But of course, this only pertains to market income and does not include other potential forms of income, such as informal income, income in goods, and imputed income from home production. All these can be important for poor households, and a better way may be to look at consumption, especially if you want to look at a proxy for permanent income rather than a temporary measure like income.

Mike Brewer and Cormac O'Dea do this for the United Kingdom. They show that the correlation between income and consumption is actually quite low, and defining poverty with income measures can be quite misleading, and they suggest this is due to underreporting of income while consumption expenditures are rather accurate, at least for the poor. This implies that if one looks at consumption expenditures to identify the poor, one should not focus so much on retirees. Indeed, they enjoy substantial housing services, need to sustain fewer people and can draw on the sale of assets. Absent a measure of consumption, using income plus imputed income from housing services does a good job, though.

Thursday, September 6, 2012

Personally, I find wind farms to be beauties. They are very elegant and even in large numbers the wind mills offer a sumptuous spectacle. But not everyone shares this point of view, and especially the windmills' neighbors are railing against their visual impact, their shade and their noise. If it is so bad, it must then have an impact on property values. It turns out that it is actually quite difficult to find a significant effect. So is all this NIMBY talk a big fuss for nothing?

Yasin Sunak and Reinhard Madlener point out that the small literature on the topic uses OLS estimates of hedonic models. That is how property valuation studies are usually done, but they find that results can change if one uses geographically weighted regressions, and one takes into account spatial autocorrelation. The analysis is performed for a particular area of Western Germany. It would have been more convincing if this study would have overturned the results of an earlier one. The study also excludes re-sales, for technical reasons. But of course, one could also concentrate on re-sales to see the impact of the windmill proposal and then its construction. Still, their specification can tease out some interesting results. OLS estimates reveal a negative impact that becomes more complex with a more general specification: the negative impact is much stronger in one city compared to the other, all else equal. Some areas even benefit. It would be interesting to see whether this is from internal migration away from the windmills.

Wednesday, September 5, 2012

The biggest waste of public resources probably comes from irregularities in procurement practices. When the bidding process is rigged, or there is none, not only does it cost more, but the job may be not be handed to the best person. The problem is that the checks and balances on procurement processes are costly and it is difficult to get complete enforcement. However, one can threaten with audits and possible punishment, and hope that will induce officials to be more careful. Does this work?

Stefan Litschig and Yves Zamboni discuss an interesting experiment from Brazil. There, local authorities take part in an audit lottery that gives them a 4-6% yearly probability of being drawn for an audit. That does not seem like a high probability of getting caught. However, for a one-time experiment, 120 counties were selected and told that 30 of them would be audited a year later. Did the 20 point increase in the audit probability have an impact? Oh yes, the probability of irregular procurement practices went down by 17-20%. The irregular provision of health services was not affected, either because it is more difficult to measure, or because potential punishment does not include jail. Conclusion: for better government practices, audit more frequently, randomly, and threaten jail.

Tuesday, September 4, 2012

Economic growth leads to higher electricity consumption. But electrical capacity needs to be put in place before we can get any economic growth. So what drives what? This is kind of important in terms of policy if you think about development. In countries where there is only intermittent power supply, do we first need to fix that, or will this fix itself once they have sufficiently grown? Or, would efforts to conserve energy consumption retard growth?

Melike Bildirici tries to sort through the empirical evidence by applying Granger causality test as well as vector autoregressions to a Markov switching model for a set of African countries (and the author will be surprised to learn Brunei is actually in Asia). The Markov switching is because one can suspect that there have been regime changes. Quite a complicated analysis that concludes that the causality runs both ways.

Now, to be frank, I find this analysis a bit vacuous, especially regarding the policy questions I alluded to. First, there is a difference between electricity capacity and consumption, and once you make this distinction, the causality is quite clear. Second, the idea that energy conservation could hamper growth is quite silly. Indeed, if one manages to do just as much with less indicates there is a increase in productivity, or you can do more with the same inputs. There is growth right there.

Monday, September 3, 2012

More and more countries are allowing double citizenship, that is, they accept that their native citizens take another nationality. Why this? Isn't there the risk of loss of allegiance to the homeland? Or are they afraid of losing some of their citizens for good? It is certain that once your nationality becomes less valuable (say, by observing the value of the passport on the black market), it becomes difficult to avoid native citizens dropping the passport for another one.

Djoulassi Oloufade and Roland Pongou point out that there is another good reason to allow double citizenship: it creates a diaspora that still keeps an attachment to the homeland and may help it in some ways, for example through remittances, international trade, return migration or even foreign direct investment. Oloufade and Pongou use the timing of double citizenship recognition to analyze its impact and find that both developed and developing countries win, in the latter case by more than what could be achieved by stabilizing government or avoiding civil strife. Allowing double citizenship is a simple and efficient way to promote growth.